0

Apple’s Manufacturing Costs Soar: Does This Mean a New Product?

It's official! Apple (NASDAQ: AAPL) recently sent out the press invites for a "special" Sept. 9 event with the tag line "Wish we could say more." For Apple analysts and fans, the invite didn't say anything they didn't already know. For a company once hallmarked by secrecy, Apple's supply chain leaks and media outreach have become almost formulaic -- this is the official iPhone 6 release event.

However, this time may actually be different. A new research note from Amit Daryanani of RBC Capital Markets reports that Apple's manufacturing and component costs are up substantially, leading to the widespread theory that the company will release a new product. Will Apple finally bring its first post-Steve Jobs device to market?

About that research noteDaryanani specifically analyzed Apple's manufacturing and component costs. As many companies do, Apple develops the design for a device, then looks to suppliers to provide components and a host of Asian-based manufacturers to assemble to final product. One of the better-known manufacturers is Taiwan-based Foxconn.

Those specific costs were up 18.5% year over year for the quarter ended in June, according to the note. This large increase is noteworthy because this is Apple's "ramp-up" period for its heavy first fiscal quarter which begins in October and includes the holiday season. Analysts also expect the new iPhone model release to come during the period.

And while these costs could specifically relate to increased costs or production of a larger number of iPhone units, a specific and "material" spike in commitments for tooling -- aids, molds, fixtures, cutting tools, and such -- points toward an entirely new form factor in addition to upgrades to Apple's iPhone line.

Apple's top line could use a new productApple has been on a run of late, with the stock sitting near a split-adjusted high on a per-share basis. Part of that is due to its massive share buyback program. That said, the company's current market capitalization of roughly $615 billion falls short of its all-time high of over $650 billion. Apple is doing well on the back of iPhone 6 speculation and a 7-1 stock split that "broadened" the investing base. Company shares are up nearly 50% on a one-year basis.

However, the fundamentals did not do as well during the same period. On a top-line basis, the company grew revenue 5.1% over the past 12 months. Apple increased its earnings per share 8.2% over this time frame with economies of scale, a better product mix (read: more iPhones sold), and its massive share buyback outweighing those aforementioned additional manufacturing and component costs, among others.

Apple's smartwatch will help the bottom lineApple's widely anticipated smartwatch will help to grow the top line. If in-the-know Apple analyst Katy Huberty is correct, it should also provide a boost to Apple's bottom line. The Morgan Stanley veteran estimates Apple's smartwatch -- dubbed iTime -- will sell anywhere between 30 million to 60 million units during its first year on the market, at an average selling price of $300, and will provide gross margin between 40% and 50%.

For perspective, Apple's gross margin over the last four fiscal quarters was 38.4% -- below Huberty's least-ambitious gross margin figure. To be fair, many have questioned Huberty's figures, but mostly on the units sold and timing rather than than the gross margin figure.

Apple analyst and supply chain guru Ming-Chi Kuo took a more bearish path initially by predicting the watch will face substantive production delays, forcing a 2015 release. Follow-up reports point toward Apple announcing its smartwatch at the Sept. 9 event for a later release.

Final thoughtsWhile most Apple fans are looking forward to the rollout of the newest iteration of its hugely successful iPhone line on Sept. 9, I'll be eagerly anticipating a smartwatch announcement. At this point, I feel iPhone success has already been figured into the company's valuation. However, if Apple can amaze us once again with a revolutionary product, look for it to power past its all-time high market valuation.

Leaked: Apple's next smart device (warning, it may shock you)Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Sending report...

After working at The Motley Fool, Jamal Carnette decided to try his hand at writing for a change. You can find him writing about technology, consumer goods, sports, and pontificating on any competitive advantage. His previous jobs include Mortgage Trainer, Financial Advisor, and Stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance and is a CFA Level 3 Candidate. Follow me for tech trends, info on consumer brands, and sports banter.
Follow @TMFJCar